Diehard followers of Moammar Gadhafi are refusing to surrender, raising the prospect of new fighting in Libya when an ultimatum expires after this week's Eid holiday.

The new ruling council, keen to consolidate its grip and relieve hardship after six months of war, won a $1.55 billion cash injection when the U.N. Sanctions Committee released banknotes in Britain in frozen accounts once controlled by Gaddafi. The new leaders said Libya may start pumping oil again in days.

In the capital's newly renamed Martyrs' Square, hundreds of people gathered for morning prayers Friday to celebrate the Eid al-Fitr holiday that marks the end of the Muslim fasting month of Ramadan, delighted at Gadhafi's downfall.

It is the most beautiful prayers. We are filled with joy, Gadfafi made us hate our lives ... We come here to express our joy at the end of 42 years of repression and deprivation, said Hatem Gureish, 31, a merchant from Tripoli.

This is the most beautiful Eid and most beautiful day in 42 years, he said.

Security was tight at the square where Gadhafi had been due to commemorate the 42nd anniversary of the coup that brought him to power on Sept. 1. Sniffer dogs checked worshippers and armed men stood on rooftops to guard against an attack by Gadhafi loyalists.

There may be some pockets of Gadhafi forces but generally the capital is secure, interim interior minister Ahmad Darat told Reuters. We have created a security team to manage the crisis and preserve security in the capital.

This is a day of freedom, a day I cannot describe to you. It is as if I own the world, said Fatima Mustafa, 28, a pregnant woman wearing a black chador. I'm glad I haven't given birth yet so my daughter can be born into a free Libya.

On the front lines of a pincer thrust toward Gadhafi's coastal bastion of Sirte -- one of several places, including Tripoli, where his enemies think he may have taken refuge -- fighters for the interim ruling council paused, observing an effective ceasefire announced by their leaders until Saturday.

GRAND-DAUGHTER BORN IN ALGERIA

NATO warplanes have been bombing Gadhafi forces near Sirte, and the alliance has assured its Libyan allies that it will keep up its military drive from the air for an end to the conflict -- something the council leadership says will only be secured once Gadhafi is found, dead or alive.

Council chief Mustafa Abdel Jalil, who as Gadhafi's justice minister until turning against him this year has had ample opportunity to observe the survival instincts of one of the world's longest ruling autocrats, warned again on Tuesday:

Moammar Gadhafi is not finished yet.

He still poses a threat to Libyans and the revolution. He still has pockets of support in Libya and supporters outside Libya, both individuals and countries, Abdel Jalil said in the council's eastern stronghold of Benghazi.

In the Sahara far south of Sirte, the town of Sabha is among those where the writ of the ruling council does not run.

It was across the desert that Gadhafi's wife and three of his children fled into Algeria. They arrived just in time for his daughter Aisha to give birth at the oasis of Djanet on Tuesday, according to Algerian officials who tried to soothe Libyan anger by insisting they granted refuge to the Gadhafis out of concern for the expectant mother and in the traditions of hospitality entrenched in local nomadic culture.

Algiers, wary of any threat the Arab Spring movements might pose to its own veteran rulers and fearful that a post-Gadhafi Libya might be helpful to its Islamist enemies, is not among the four dozen or so countries to recognize the National Transitional Council as Libya's legitimate government.

But, according to an Algerian newspaper, it has decided not to give asylum to Gadhafi himself and would hand him over, if he arrived, to the International Criminal Court at The Hague, which has indicted him, his son Saif al-Islam and his intelligence chief for crimes against humanity.

HUNT FOR GADDAFI

The whereabouts of all three are unknown, though council fighters said intelligence chief Abdullah al-Senussi had been killed over the weekend along with Gadhafi's son Khamis, a military commander. Both men had been reported dead before.

Ahmed Bani, a military spokesman for the council, again ruled out any negotiation with Gadhafi or his supporters and called on those holding out to give up quietly: We will not negotiate with his murderers and the likes of him, he said.

We are still hopeful there will be a peaceful proposal put forward before Saturday ... Zero hour is quickly approaching.

The week since Gadhafi's Tripoli compound was overrun may have eroded the conviction among many of his enemies that he was near at hand in the capital and close to capture.

There are no confirmed reports of his movements, whether it be to Sirte or otherwise, Bani said. But it's obvious the noose is tightening around him and sooner or later he will be captured or found.

Interim oil minister Ali Tarhouni, speaking in Tripoli, said: We have a general idea where he is ... We have no doubt that we will catch him.

Many are conscious that Saddam Hussein evaded capture in Iraq for eight months, while an insurgency, partly in his name, took root. With long-prepared access to funds and some old favors to call in, Gadhafi could find refuge abroad.

George Friedman of U.S.-based risk advisers Stratfor warned it was premature to call the conflict over: Gadhafi's forces still retain military control of substantial areas ... Gadhafi is still fighting and posing challenges. The war is not over.

He also noted concerns about the ability of the council to establish control of the country more generally.

ABUSE ALLEGATIONS

Its leaders insist that, in the face of evidence of the killing and torture of prisoners by Gadhafi's forces, their own men are to treat their captives with respect to foster cohesion in a country lacking many government institutions and long used to tribal and ethnic division.

Amnesty International said its staff had seen anti-Gadhafi fighters threaten and detain wounded opponents, notably black Libyans and foreigners.

The council must do more to ensure that their fighters do not abuse detainees, especially the most vulnerable ones such as black Libyans and sub-Saharan Africans, Amnesty's Claudio Cordone said in a statement after one incident in Tripoli.

Many risk reprisals as a result of allegations that al-Gadhafi forces used 'African mercenaries' to commit widespread violations during the conflict, the lobby group added.

Interim interior minister Darat said he hoped to build up new security forces to absorb some of the young fighters now roaming with weapons and would work to instill order: Our goal is to implement justice for everybody, including Gaddafi loyalists, he said.

One important element in efforts to establish the council's rule as it prepares for a new constitution to be followed by elections will be a return of export profits from oil and gas.

Oil production could restart within weeks and reach full pre-war output within 15 months, the newly appointed chairman of the National Oil Corporation (NOC) said on Tuesday.

Starting up production will be within weeks, not months. After we start it will take less than 15 months, Nouri Berouin, chairman of the NOC, told Reuters.

(Reporting by Mohammed Abbas and Samia Nakhoul in Tripoli, Maria Golovnina in Misrata, Robert Birsel, Emma Farge and Alex Dziadosz in Benghazi, Lamine Chikhi and Marie-Louise Gumuchian in Algiers, Joseph Nasr in Berlin and Christian Lowe, Giles Elgood and Alastair Macdonald in Tunis; Writing by Alastair Macdonald; Editing by Tim Pearce)